Brutus is a division of Madam Medusa\'s Pawn Shop/Boutique, Inc. Last year, the

Question

Brutus is a division of Madam Medusa's Pawn Shop/Boutique, Inc. Last year, the division generated operating income of $609,840 and sales revenue of $10,890,000 The division had invested capital of $3,000,000. Using only the information given, which of the following statements is correct? O A. For every dollar of capital invested, $0.20 of income is earned. O B. If the division's manager is evaluated based on maintaining the division's current Return on Investment, he would accept an investment opportunity that would C. O D. 0 E. yield a return of 18%. For every dollar of capital invested, $3.63 of income is earned. For every dollar of sales revenue generated, $0.56 of income is earned. If the company's hurdle rate is less than 20%, the residual income for Brutus is negative.

Explanation / Answer

Solution:

We will need to check the correct statement individually:

A --- For every dollar of capital invested $0.20 of income is earned i.e. Operating income 609,840 / Invested capital 3,000,000 = $0.203 ---- This statement is correct

B -- Yield of This opportunity = Operating INcome 609,840 / Investment 3,000,000 x 100 = 20.33%

The manager should select the project which have higher that 20.33% Yield. Hence this statement is incorrect.

C -- Refer working for A -- This statement is not correct.

D -- For every dollar sales revenue generated, $0.056 of income is earned. i.e Operating Income 609840 / Sales REvenue 10,890,000 = $0.056 -- Hence this statement is incorrect.

E -- Incorrect statement.

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